State Takeover Is A Positive For Detroit Bondholders

By Michael Aneiro

Last Friday’s state takeover of Detroit’s finances should benefit bondholders one way or another, according to Alan Schankel of Janney Montgomery Scott. (As I wrote in this week’s Current Yield column, the broader muni market largely shrugged off the news). Here’s Schankel’s take on the implications for the muni market:

In November, Michigan voters shot down the state’s emergency manager law, considered one of the strongest in the country, but Governor Snyder signed legislation in December for a replacement law, which gives local officials more input into decisions. An emergency manager will have significant powers, including the ability to modify existing collective bargaining agreements. Detroit, currently rated Caa1/B/CCC, has been operating under a consent agreement with the state since last April, but seemingly intractable political challenges limited progress in addressing the city’s financial challenges under the agreement. The appointment of an emergency manager is a credit positive for bondholders, and although there is no assurance that bankruptcy will be avoided in the long term, or that investors (and insurers) holding about $14 billion of various types of city debt will emerge from the process financially whole, the process for recovery should be more efficient and less subject to political wrangling than we’ve seen up to now.